Ladies and gentlemen, thank you for standing by. Welcome to the Natuzzi 2022 fourth quarter and full year financial results conference call. [Operator Instructions] Joining us for today's call are Mr. Antonio Achille, Natuzzi's Chief Executive Officer; Mr. Carlo Silvestri, the Chief Financial Officer of Natuzzi Group; Mr. Pasquale Natuzzi, Founder and Executive Chairman; and Mr. Jason Camp, President Natuzzi Americas; and Piero Direnzo, Investor Relations. As a reminder, today's call is being recorded. I'd like to turn the conference over to Piero. Please go ahead.

Thank you, Kevin. Good day to everyone. Thank you for joining the Natuzzi's conference call for the fourth quarter and full-year 2022 financial results. After a brief introduction, we will give room for a Q&A session. Before proceeding, we would like to advise our listeners that our discussion today could contain certain statements that constitute forward-looking statements under the United States securities laws. Obviously, actual results may differ materially from those in the forward-looking statements because of risks and uncertainties that can affect our results of operations and financial condition. Please refer to our most recent annual report on Form 20-F filed with the United States Securities and Exchange Commission for a complete review of those risks. The company assumes no obligation to update or revise any forward-looking matters discussed during this call. And now, I would like to turn the call over to the company's Chief Executive Officer. Please, Antonio.

Thank you, Piero and Kevin, for kind introduction. Good morning and good afternoon to all the attendants of this 2022 fourth quarter and fiscal year press release. I would like to start more from an overview of how the 2022 closed for us. Then I will let Carlo Silvestri, who has been announced already joining our group from Ferragamo, our new CFO, to comment more specifically on figures regarding fourth quarter and fiscal year. So we closed 2022 internal revenue at €468 million which is 10% more than last year and some 20% more 2019. If we go back to 2020, that is an increase of 40%. So we kind of added €140 million business from the 2020, which was clearly affected by COVID. So I will say high single digit top line increase. This can also, in parallel, continue working on gross margin. As you may remember, 2022 was dominated by a strong inflection on general cost and raw material. We were working so to protect in spending our marginality, which is currently 5 percentage point above what it was in 2019. So we were able to protect and expand marginality. In term of EBITDA, that -- in term of operating profit, that resulted in €8.4 million, which could have been a higher figure, could have been close to €13 million if we didn't have to do accrual for very specific one-off element which will be commented by Carlo later in this section. So in general, the trajectory is going north on the two fundamental duration that we have in our long-term plan, which is top line growth and the margin and profitability expansion. At the same time, which is another as a proxy of value creation, we expanded our cash flow from operations, which was close to €19…

Thank you, Antonio. Good day, ladies and gentlemen. Let me first briefly introduce myself since this is my first conference call with the Natuzzi group. But before doing that, allow me to thank Mr. Natuzzi and Antonio for the opportunity of this incredible exciting experience and my team for the great support that I've received so far. Now going back to myself, I spent my last 16 years in Asia. And recently, I served in the last nine years as a CFO for Salvatore Ferragamo that is a luxury brand listed in Italy in the Milan Stock Exchange and is also distributing China through a joint venture as Natuzzi is doing. I was serving at the same time as a CFO, but I was in charge also about the retail excellence and managing directly the stores of Hong Kong and Macau. Thank you very much. Now, going back to the figures after the closing comments of Antonio, I will start with an overview of the 2022 fiscal year with some hints of the fourth quarter. In 2022, total revenues were at €468.5 million, up by 9.6% versus 2021 and by 21.1% versus the pre-pandemic 2019. During the year, we were also able to recover from the major supply chain disruption of Jan 2021, and gradually we benefit in the reduction of our order backlog. Talking specifically about the gross margin, we achieved a 35.1% versus 36% in 2021 and 29.7% in 2019. As a reminder, in 2022, our industrial operations were deeply affected by both spike in energy cost and inflationary environment. Together, the company decided to protect the margin, and during the year, through different phases, we did apply price increase all over the world. This has been fully effective only in the last part of the year where…

[Operator Instructions] David Kanen.

So I guess I'd like to call out what I would call the encouraging signs. If we add back the nonrecurring item, the labor costs that affected gross margin, we would have been nearly 39%. And then there was some nonrecurring items, extraordinary items in the OpEx line whereby we would have had a significant operating profit. So I'd like to just call that out. What's exciting is as we grow and scale the business, we see the significant leverage in the financial model. Now that that being said, it would have been nice just to show after all of these items have bigger profit, but it is encouraging. So in the past, you guys have called out backlog in written orders. We know that traffic is down at the retail level. Could you give us some sense where backlog is currently? I believe last quarter, I'm going by memory, it was around $80 million. And then also what type of declines are we seeing in written orders given the weaker housing market economic backdrop?

So thank you for your question. I might take this one. So the reason why we are putting a lot of emphasis in the past -- to the backlog because it was a main -- for two reasons because it was an obstacle for us to delivering the revenue we could have delivered; and second, because it was becoming very visible obstacle to maintain the level of service to our client we aspire. The backlog now went back to what they can define as physiological level to standard level, which is pretty much €60 million, which is what -- typically, we need to do a proper planning of the factories. In term of written order, the year, as I mentioned in my press release, started to a level that is, let's say, below our expectation. What is somehow positive is that if you read these first 14 weeks, and we divided by two, the last seven weeks saw a relatively stronger turn versus the previous one. But clearly, we are facing a level that is not in line with what we want to have, and we aspire to have also in light of our production capacity. I will just remind that Natuzzi Italia gets produced globally in Italy where we have a significant population of workers and a significant safe production capacity with five factories. And at the moment, especially for Natuzzi Italia, the level of order we are receiving does not allow us to fully occupy those factories. So that is the main element that we are working to improve, both as a combination of opportunity to sustain our growth ambition, but also as a need to keep busy at a reasonable level our factories. So that's a bit -- a long answer. So inventory is back to standard level. I don't have the figure in front of me, but it's in the ballpark of €55 million, €60 million. And when talking about, let's say, pace of orders, as I mentioned before, below expectation. And it's a different situation among regions. We have China, which was extremely -- it's different, sorry, different across region in China. So China, which is mostly operating to franchising, we see a recovery of Natuzzi Editions business, while Natuzzi Italia was quite stuck there in the channel and the recovery is lower. Natuzzi Editions North America is above budget but below last year. And Europe is a more -- a mixed picture. And I think at the moment, Europe is the continent which is a bit more difficult to predict because its economic environment is the one which is still struggling to find a way out of the last -- past grueling months. So I think we will see first recovery coming from US, and China is a combination of both the market condition and also the action we are taking. And I think, let's say, turning point for West Europe is less easy to predict in terms of timing.

Okay. And, guys, just to recap: the progress, which is gross margins moving up significantly, this is the result of a shift in mix, primarily the branded product. It seems away from wholesale. And in the past, you've talked about opening up 10 stores in the US, 10 DOS stores, which would continue to grow DOS and flow through the P&L, higher-margin branded product. And then also, you've talked about Factory 4.0. Just a suggestion, as an investor, what I read in your press release is postponement of some planned investments for Factory 4.0, which I understood as being accretive to gross margin and then also paring back the number of openings in North America from 10 to six. I would encourage you to actually put your foot on the gas pedal to -- I know you're trying to conserve cash, but perhaps to get rid of non-core assets, real estate to accelerate this transformation to higher-margin product and to greater efficiency in the factory. During this time of, let's call it slowness, economically, we can play some offense and yield even better results than what we did on an operating basis in the long term versus Q4. So that's my feedback. I mean, I would love to hear your commentary on that. If those investments are going to yield better operating profit, why would we be pulling back?

No. Strategically, Dave -- and I speak, let's say, for the group because we have constant alignment with the Board and with the Chairman. Strategically, we cannot be more in line in agreement with you. We definitely don't want to pull out from our retail strategy in 2023. We actually confirmed six openings. And I would say, some of those are pretty signature openings, like the main asset is going to be 10,000 square feet in the Golden Mile. We are near the downtown, so really kind of flagship location that would be used. And there will be Atlanta. There will be San Diego, and there would be the first [of these] for Natuzzi Editions. So we are keeping the pace, considering the constraints. We are trying to remove, as you mentioned, the constraints. The way we are trying to move some of these financial constraints is also rate, the disposal of non-strategic assets, the largest one is [on point]. We're actively working on the dossier. As I mentioned, it's something I cannot be more precise. But I hope that sooner rather than later, I can give you some positive outcome. As you can imagine, given the high interest rate, it's not the easiest way at the moment to sell real estate assets because the loan to value for a potential buyer is not easier. But really, because of the determination you mentioned before that this money could be actively reinvested to increase efficiency in our factory and to open more in the US, we are continuing pursuing that option. So we are not stepping back in term of strategy. We just need to finalize the strategy and we're looking also the standard way to achieve that goal.

Okay. So you're reiterating those plans to continue with Factory 4.0 and to continue to open branded DOS stores in North America then?

Correct. I don't know, Jason, if you want to make any comment. And again, I think, as I mentioned before, it is a dual strategy when it comes to retail because, yes, we want to open new stores. But the other things we want to continue is to increase like for like because we do see that among our 52 stores, which are directly operated, there is still a significant variation of performances. Some of those variations are justified by structural elements. The company has been opening the stores since a few years now. And the location, maybe they were initially spotted for some of the stores. They won't be a location that now we would consider ideal. Also, there is some structural factor. But other than that, we want to improve the productivity of the store. So for us, when we talk about retail, yes, there is new opening, but we see a very important opportunity also of increasing the productivity of the current store. That would also facilitate a new opening because given the current economics, it's really very attractive. By the way, if any of you investors want to open a franchise, you're welcome. One of our stores normally has a payback in 16, 18 months and then start generating double-digit EBITDA. But working on organic improvement will also shorten the payback of those investments. So we're also working that as a way to facilitate the enrollment of additional franchisee partner. Jason, Pasquale, if you want to provide any color, respectively, on US or retail, of course. I don't intend to monopolize the dialogue. You are very welcome to join. And I must say, Pasquale has been an active force also in driving this acceleration on retail. Jason, do you want to provide any color on US, maybe?

Sure, I'd be happy to, Dave. First, forward looking, as the release suggested, we've got six DOS that we plan to open this year, in this case, all Natuzzi Italia, adding volume to our flagship factory in Italy, plus the FOS in -- around the US, mostly Natuzzi Editions. So a total of nine openings projected in the US for the year. I would say that as we look at our like-for-like performance, we finished 2022 basically flat to 2021 from a like-for-like retail performance. Obviously, a stronger start to the year, slower finish, but I think what's most important is that when we look at, let's say, our current pace of business in the last three months, six months, those like-for-like stores are still up between 40% and 50% to 2019. So while a lot of companies, retail businesses kind of reset down much closer to 2019, our like-for-like performance has been reset to a much higher average. And it really encourages us for the future strength of our growth as we open new units.

Okay. I appreciate you calling out the focus on organic growth or same-store sales, and that's the critical metric. A couple more questions, and I'll go back to queue.

So David, just to -- sorry to interrupt you. Sorry. But just to give you a bit of color why we are so passionate about this, we see that in store -- so just to give you some color, we saw that in stores, where we change, for instance, just the leader of the team and we do a more accurate management of some of the levers we have, the results are pretty astonishing. Just let me pull out the two stores. One is [Westfield], which is one location we had for Natuzzi Italia in London in a high-end retail park. The store is performing 68% above last year. But as you remember, it was a very, very strong part of the year, and it's significantly above our internal budget. This is because we changed the team. We created better dynamics, same -- and Jason can comment. It's happening to our Madison store, which historically, despite the iconic location, was not as sales productive as how we wished. Again, new team, attention to details. Now, Madison is depending on demand, so either the first or among the first four top stores in US. So that the reason why we say less -- of course, expand our footprint. We already have 700 stores. We're going to spend it. But let's recognize that even though 700 stores today were performing homogeneously on a certain level, that will be solving a lot of our goals already. Sorry, Dave. I hope I didn't frustrate you by interrupting you.

No, no, I appreciate that color. I mean that's actually been my belief and assumption that there is a tremendous opportunity to increase average unit volume when I compare you to your peers. So I appreciate that call out. So just two more quick questions. How much cash is in the China JV? That's the first one.

Just a clarification, and then I'll let in Carlo. The JV, of course, is part of a listed company. So we can report the last certified figure, which has gone in the 20th. So we can just share that figure. So please, Carlo and Piero, share the figure.

So the JV reported €33 million in terms of cash. And that has been the result of the sales, the distribution of dividends, and the capital reduction together versus the last part of the year, an increase in the purchase of the stock, the JV, and a decreasing of the orders. So that's the results, but we still have €33 million.

Okay. And when you say €33 million, is that the total, and our portion is roughly half of that? Or are you saying after 49%, it's €33 million.

It's the total, but these are referring on not audited numbers by, let's say -- that are not published by the JV.

Okay. And then --

Just a clarification there. It's important. So if we look at the -- and again, we should be just reporting official number because the JV is also part of a -- it's also owned by Kuka, which is also a public company. So what happened in looking at the delta of cash versus plus last reported year, it happened to offend. One, let's say cash distribution, a capital reduction of some €9 million in total if we take euro. Then, as I referred before, the JV itself invested some €15 million in stock. Why that? Because, as I mentioned before, we've moved from a phase where the issue was having the product to a situation where it's more about selling. So in the first part of the 2022, the JV took the decision of investing in some inventories in a significant manner. So when you look at the total active balance sheet of the JV, you'll find that between fixed asset and cash, the total isn't changed. The method of the distribution was changed in the distribution because it's been reduced, the cash, in favor of inventory. So there's been no dilapidation of cash. There has been just a different use of that cash.

Yes. Correct. Absolutely correct.

I understand. And then, if you could take a stab at gross margin post Factory 4.0, I know we've deferred or postponed some of those investments, but I'm thinking longer term, one, two, three years out. And it seems to me like we can get to a low 40%, maybe 42% type of gross margin. What would have been the effect if we had fully deployed Factory 4.0 at the current revenue run rate? Would we get into the low 40s or not quite yet?

So I can answer you in a bit more elaborated way, but it's not just because I won't go to straight to the point, but because it's a complex reality. So we have four main areas of production which are directly operated. So we have Italy. We have Romania. We have Shanghai in China. We have Shanghai and another city, Quanjiao. And then we have Salvador de Bahia. Each of those production facility has very different cost of production as a matter of cost of labor, efficiency, utilization of the factory, and cost of materials because the material depend very much on where you produce. In addition, we are, as we planned, working in outsourcing for the time being in Vietnam, which has a strong advantage in term of duties to serve US. So the first way to reduce the cost of production and to spend margin is an optimal utilization of those platform. So for instance, just to quote you a figure, moving a production unit from China to Vietnam allows, on average, between 15 and 18 percentage points more. It's a combination of labor cost but especially duties. So you can easily understand that that provides us an incentive to do so, especially for those large clients that can be served with stock order from Vietnam. So the first lever to optimize the cost of production of this part and gross margin is an optimal location of the sourcing in production choices. When it comes to Natuzzi Italia, as I told you, it's entirely produced in Italy. There we placed the game of the Factory 4.0, especially on that part of production. So I don't have a precise figure to quote on what should be the short-term expectation. But clearly, 4.0, we assess it in the pilot that we've done. And it's beneficial in term of margin improvement. And the topic that is of paramount importance at this phase, even more than rolling out this Factory 4.0 technology, is ensuring an adequate utilization of the factories because factories have functioning costs, which are fixed label. To understand, it's fixed because we cannot rule out people. So we need to make sure that we have a good level of utilization to start with, which is a of a higher relevance in this phase than the benefit that can provide the Factory 4.0 technology. There's a reason why we're also saying that in this phase, we are having a more gradual rollout of the Factory 4.0 technology in Italy because the priority at this moment is really to fulfill the capacity because that will bring the highest benefit in term of reduction of cost of production.

Okay. But in the past, you've said that you expect a mid to high single-digit improvement in those factories that have been automated with Factory 4.0. Is that still a fair statement, 5% to 7%?

Yes, it is. I'll talk about the high single digit. It still is the case, but that needs to happen with factory, which is a good level of utilization. So that needs a good level of utilization. So we need now to make sure we have a good level of utilization of those factories. Then the Factory 4.0 technology can provide an overdrive, but provided we have a good level of utilization. A good level of utilization for us means 85% plus because it's a fixed cost business. When you go below that level, the cost of production increases quite significantly because the cost of functioning, so electricity and whatever, plus the cost of labor get absorbed by a lower volume of production. So if we were to, like it was last year, in a situation of full saturation of the factory, the Factory 4.0 would have provided the kind of incremental benefit you mentioned, and we would have accelerated the investment. In this phase, where we have this saturated factory, the priority for us is more commercial. It will make sure that Natuzzi Italia can regain the growth momentum needed to fulfill the factories.

Yes. Okay. I really don't have any more questions. I'm just going to make a comment, and I think we're in agreement here, but you called out that there's opportunity to grow same-store sales in your direct operated stores. I would exert you guys and encourage you to accelerate that to perhaps go to be even more aggressive during the soft patch in the economy. Because, ultimately, as you said, you have more control. You don't have a lot of control with a third-party retailer selling Natuzzi product, whereas you can better train your people and align them and still potentially affect same-store sales growth. And then, of course, we know the impact, as you said, having the factory at fuller capacity improves gross margins, okay? And then, of course, we know selling branded product is in the probably mid-70% gross profit range. So I would actually encourage you guys again to play offense and to accelerate the deployment of stores in North America. And that's pretty much all I have, guys. I'm encouraged by the operating profit, excluding the one-time items. And I'm sure, by the end of the year, we'll be looking at a better economic backdrop. So thank you.

Thank you, Dave. Also, thank you for your continuous dialogue. It's highly supportive for us to set the priority. You, of course, have been invested in the company for enough time to understand our trajectory and our challenges. So your contributions are particularly valuable to us.

Thank you. [Operator Instructions] There are no further questions at this time. And I turn the floor back over to management for any further or closing comments.

So thank you for all your attention. As we mentioned before, we keep focusing on our priority. I must say our team is very cohesive. We do experiment with headwinds, reading what's happening in the market. We're not alone. We're paying particular focus to our fundamentals cash position to ensure we can go through this turbulent time without jeopardizing our long-term objective. And I look forward to reconnect with you either on individual conversation if you want to have more color in what has been discussed today or in our next press release for the first quarter of 2023. From my side, thank you. I don't know if Pasquale wants to provide any final word.

Antonio, you did a good job, and Carlo. And I thank you very, very much. [Indiscernible] The speech was very well done. And thank you very much, our shareholders. And we are all committed to overcome any kind of difficulty as far as we can. Thank you again.

Thank you again.

Thank you very much.

That does conclude today's webcast. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.